Investing offshore – mind the red tape

The world is becoming a more difficult place to invest. There are more and more rules to be considered, and the existing rules are being enforced more strictly and more often. Genuine global diversification relies on legal strategies and greater transparency, which come with lots of red tape. We have certainly seen a huge increase in the documentation that clients are required to submit, both locally and offshore. But we are not alone, and in worldwide efforts to stamp out tax evasion, money laundering and terrorism, this is now the new norm.

Fortunately for South African residents wanting to diversify globally, exchange controls have relaxed considerably in recent years, and we can now legally export a total of R11 million a year. For those wishing to export in excess of this, application can be made to the Reserve Bank. But in their rush to send funds offshore, many investors (usually those acting without an adviser), have given little consideration to the compliance, taxation and estate planning consequences of their offshore investments.

SA residents are taxed on worldwide income and capital gains, irrespective of where the assets or investments are situated. Similarly, the value of offshore assets will be included in the estate of a deceased SA resident and will be subject to Estate Duty in SA. In many cases, the assets will also be subject to Estate Duty and Income Tax in the country in which they are situated, where are they taxed at source. Double Taxation agreements may ensure that a taxpayer doesn’t pay tax twice on the same asset – however the tax regimes can be more onerous in some offshore regimes. Anyone tempted to try and “hide” money offshore, however, will find themselves facing prosecution.

US citizens and resident aliens have been subject to FATCA for a number of years. This is the US federal law that requires all non-US financial institutions to report on the identities and assets of all account holders with US status.

Following in their footsteps, OECD introduced the Common Reporting Standard (CRS) in 2016. CRS involves the automatic annual exchange of information about foreign financial accounts between the tax authorities of member countries. CRS is the latest solution to cracking down on undisclosed offshore accounts by allowing entire countries to mandate financial institutions to share data, allowing them to keep tabs on their citizens. So far, more than 100 countries (and more being added) – including most tax havens and offshore banking havens – have signed up and have started exchanging information, with SA one of the early adopters. Account balances at year end, as well as movement in the account will be reported on. For Trusts, this will include the total value of the Trust, movements during the year, details of who funded the Trust, beneficiaries who have received a benefit, and Trustees.

Under CRS, financial institutions have to ask where you are tax resident and they won’t take “nowhere” for an answer anymore. It’s the end of the old “Swiss Bank Account”, with these banks now closing non-compliant accounts, no longer willing to risk their reputations for “grey” money. While there are plenty of countries that haven’t yet signed up, you wouldn’t want to visit many of them, let alone bank there (think of Sierra Leone). And while property doesn’t form part of the CRS requirements, as soon as a property is sold or rented out, then the flow of funds is reportable.

Fortunately, many South Africans took advantage of the last available opportunity to regularise their previously undisclosed assets through the amnesty process in 2016-7 (the Special Voluntary Disclosure programme).

In a nutshell, CRS and FATCA are part of a wider global initiative aimed at combatting money laundering and cutting down on tax evasion, given the billions of dollars in tax revenue lost to tax authorities worldwide.

The result of CRS and updated SA legislation is that the compliance requirements have become increasingly more demanding – all our service providers are requesting updated FICA documents, with more requirements for Trusts and other legal entities. Full details of the tax status, residency, origin of wealth and source of the funds must be fully disclosed for each and every new or additional investment.

While these requirements are onerous, time consuming and burdensome for clients and providers alike, ultimately it is for the benefit of investors. Netting the tax dodgers and money launderers not only discourages criminal activity but could help us to avoid future tax increases if everyone pays their dues. Billions were brought into the tax net as a result of the offshore amnesty, and following the firing of the corrupt former SARS head, tax revenues will hopefully no longer be diverted into the pockets of criminals. SARS have already shown their intentions in targeting key players in the SA criminal underworld. An added benefit is that it will be harder for these criminals to do business anywhere in the world. And that must surely be a good thing.